Asian Capital Pours Into Aussie Funds

The release of the government’s Asian Century White Paper last month was hailed by commentators as a crucial step in building closer ties between Australia and its regional neighbors.

But according to a report published Tuesday, Australia’s fund management industry has been doing it for years.

The study by the Financial Services Council and The Trust Company–who surveyed managers accounting for around half of the 65 billion Australian dollars (US$68 billion) of overseas-sourced funds in Australia including UBS, Macquarie and Alliance Bernstein–found that investment in Australia through Managed Investment Trusts increased by more-than half from the start of 2010 to a total of A$33.6 billion by the end of 2011.

During this period, investment from the Asia Pacific region accounted for 68% of fund flows, with A$14.75 billion in funds invested at January 2010 increasing to A$19.44 billion by the end of the following year. That’s the highest increase in funds from any region over the period, with flows rising by a third in the two years.

“Funds sourced from overseas, especially the Asia Pacific Region, have the potential to increase exponentially if the right policy settings are in place,” said John Brogden, Chief Executive of the Financial Services Council, a lobby group for the industry.

Australia’s relatively resilient economy, which has managed to avoid recession during the global financial crisis, has also proved an appeal to investors. The FSC survey found that property, fixed-interest products and Australian shares were the top three asset types attracting investors, posting respective growth of 47.9%, 44.2% and 24.7%.

Andrew Cannane, head of corporate services at The Trust Company, told Deal Journal Australia that he has seen strong appetite for Australian property assets from global pension and sovereign wealth funds and he expects that to grow over the next 12 months as they seek to diversify their asset base. Investment by overseas sovereign funds almost trebled over the period to A$1.1 billion from $367 million.

Canadian pension funds, which have been looking at bidding for New South Wales port assets as well as taking a stake in the sale of Sydney’s desalination plant, are also particularly likely to play a bigger role due to the weakening of the Australian dollar against their local currency, he added.

“These type of funds much prefer to invest in a port to Australia in service China than to buy a port in China,” he said. “They look at Australia as absolutely being part of Asia.”

But as the country’s resources boom has started to wane, Canberra has been trying to fund new ways to cash in on Asia’s growth by positioning itself as a regional financial services hub. Growing its A$1.8 trillion funds management industry, which is highly-regarded internationally for its disciplined approach and breadth of experience, is a key part of that plan.

So far that dream of turning Sydney or Melbourne into a rival to Hong Kong or Singapore is a long way from fruition.

On Australia’s dominant exchange, the ASX, only around 5% of companies listed are headquartered overseas, compared to between 20% and 40% of markets in other major financial centers. Despite government lobbying, Australia has not yet signed a pact for direct convertibility between its currency and the Chinese yuan–seen as a key step to deepening ties with its largest trading partner–and only around 1% of trade is currently settled in yuan, according to HSBC.

Mr. Brogden said that plans outlined in the 2010 Johnson report, including an Asian region passport to enable funds to be offered across borders, removal of state taxes to levies on insurance and the establishment of an online regulatory gateway, would be key to attracting more international capital.

“Where the government has taken action to increase the competitiveness of taxation policy applied to Australian domiciled funds, fund flows have substantially increased,” Mr. Brogden said. “It is critical that the Australian Government continues to press ahead with the remaining recommendations of the Johnson Report.”